Have you ever wondered how your insurer comes up with your workers' compensation premium? Four factors come into play: your business classification, the rate for that classification, your employees' remuneration and your experience modification factor.
Business Classifications
Workers' compensation insurers group businesses into different classifications based on relative hazard. Your classification depends on your organization's primary operations. For example, roofers experience more frequent and more costly claims than in-house salespeople, so a roofing business would pay a higher rate than a sales organization. To ensure you don't pay too much for your workers' compensation, check the classification listed on your policy to make sure the insurer has appropriately categorized your business by primary operations.
Payroll
Insurers calculate your premiums by multiplying the rate for your classification by total estimated annual payroll. This includes your employees' gross wages and other compensation, before withholding taxes or other deductions.
Rates
Workers' compensation insurers show rates per $100 of payroll. In most states, rating bureaus, which are independent organizations, help determine workers' compensation rates. Rating bureaus collect data on claims and costs from member insurers, then use this information to calculate rates insurers will need to charge to provide mandated benefits without losing money. They publish rates for hundreds of different job categories, shown as rate per $100 of payroll. These rates are based on the relative hazards of each occupation.
In California, published rates are suggestions only, and individual insurers are free to charge more or less. As with anything else, however, beware rates that vary too much from the norm—if an insurer quotes you a rate that seems too good to be true, it might be!
Experience Modification Factor
If your business qualifies for more than a "minimum premium" policy, the insurer may apply an experience modification factor.
Insurance companies send information on employers' premiums and losses to the applicable rating bureau, which then calculates experience modifications based paid claims and incurred losses for the "experience period, " generally three years prior to the last policy renewal date.
The resulting experience modification factor generally ranges from .75 to 1.75. An experience modification 1.00 indicates your losses reached the expected dollar amount. A number higher than 1.00 indicates that your risk of loss is greater than average, while an experience modification of less than 1.00 indicates your risk is better than average. If you meet the minimum premium levels, keeping your experience modification low can reduce your workers' compensation premiums.
The most important step in keeping experience modifications low is to reduce your workers' compensation claims. Focus on controlling the smaller, more frequent losses--they will impact your experience modifications more than less frequent, larger losses.
Next, you'll want to periodically review your payroll and claims information for accuracy. Make sure your payroll data is accurate and your experience modification calculations include data from the proper years. And keep tabs on loss reserves--unused loss reserves affect your experience modification.
If you are interested in learning more about how your premiums are calculated, we can review your policy and claims history with you. We can also help you develop loss reduction strategies to keep your costs under control. For more information, please call the PCOC Insurance Program department at Jenkins Insurance Services at (800) 234-6363.